Central Asia and the financial crisis

After the boom

Wondering if the good times are over

FOR almost a decade, oil-rich Kazakhstan has been the economic engine of Central Asia. Since 2000 its GDP has grown by an annual average of around 10%. But now the global financial crisis is taking its toll and the Kazakhstani motor is spluttering. In 2008 the economy is expected to grow by just 5%, which sounds healthy but is still a wrenching slowdown.

Kazakhstani officials were long in denial about the crisis. But in mid-October President Nursultan Nazarbayev announced a series of measures to deal with it. Since then, the government, criticised for inaction, has gone into overdrive. Mr Nazarbayev has given Karim Massimov, the prime minister, a free hand to take any steps necessary to stabilise the economy. Mr Massimov has taken on the job with relish, declaring almost daily that everything is under control.

Indeed, some Western forecasts that Kazakhstan is following Iceland and the Ukraine towards national insolvency, seem far-fetched, or at least premature. Kazakhstan has $48.4 billion in foreign reserves, including $27.4 billion in the national oil fund, to help it weather the coming financial storms. By year-end, the government will inject a total of $15 billion, equivalent to some 15% of GDP, into the economy. This includes a $5 billion bail-out for local banks, under pressure because of their heavy foreign borrowing.

Yet things are bleaker than the government wants to admit. Sharp declines in commodity prices and demand for metals have led Kazakhstan's big mining companies to cut production and send thousands of workers on leave at half-pay. The drop in oil prices means it will not be possible to replenish the national oil fund as quickly as might be needed. “The safety cushion that we had has disappeared,” says Tulegen Askarov, a well-known economist. Moreover, no detailed programme has been revealed on exactly how the $15 billion will be used—alarming in a country notorious for corruption. “This lack of transparency scares everyone and undermines the trust,” says Mr Askarov.

Kazakhstan's economic troubles are also casting a shadow on its neighbour Kyrgyzstan, where several Kazakh banks have operations. Kyrgyzstan is a much smaller and poorer country, with only $1 billion in gold and foreign-currency reserves. Turkmenistan and Uzbekistan, in turn, are economically too isolated for the crisis to have had much impact yet.

It may be months before the full effect of the economic slowdown hits the region. Hundreds of thousands of migrants from Kyrgyzstan, Tajikistan, and Uzbekistan work in Kazakhstan and in Russia, especially in construction. As they are laid off and forced home, it may cause social tension. And remittances, a big source of foreign-exchange revenue in the region, could fall steeply in a prolonged slowdown.

Grigory Marchenko, boss of Halyk Bank, Kazakhstan's third-largest, remains sanguine. He recalls the 1998 financial crisis, when Russia defaulted, oil fell to $10 a barrel, and Kazakhstan had its worst harvest in decades. Yet its economy started to grow the very next year, and to boom in 2000. For history to repeat itself in Kazakhstan, however, the shock to the global economy from the 2008 crisis would have to be less severe than many expect.